Antitrust worries can ground JetBlue’s Spirit bid
NEW YORK, April 6 (Reuters Breakingviews) - Word from air traffic control is loud and clear. JetBlue Airways' (JBLU.O) shares fell around 5% after the U.S. carrier launched a surprise $3.6 billion bid for Spirit Airlines (SAVE.N) late on Wednesday. Meanwhile, shares in its ultra-low-cost target are trading at a 25% discount to JetBlue’s $33-a-share cash offer. Given that a combination would incur significant expenses and raise Spirit’s costs, investors are right to be skeptical. Their best hope is that antitrust worries prevent the bid from getting off the ground.
JetBlue’s offer is an attempt to break up Spirit’s pending $2.9 billion merger with fellow budget airline Frontier Airlines. That combination already looked a tough sell read more for regulators, but the latest takeover would face even more turbulence. The U.S. Department of Justice is already suing JetBlue over an operating partnership with American Airlines (AAL.O).
Companies typically justify deals on the basis of efficiency gains, some of which are passed on to customers. But a JetBlue takeover could actually raise costs. The New York-based carrier pays its pilots more than Spirit’s, and equalizing pay would be a big and necessary expense. Refitting Spirit’s fleet of planes to look more like JetBlue’s would also raise its operating costs closer to JetBlue’s, which currently spends about 50% more per available seat mile than its target.
JetBlue would therefore have to bump up Spirit’s rock-bottom fares to maintain profitability. The company led by Robin Hayes reckons the combination would produce annual financial benefits worth around $650 million a year, mostly by boosting revenue. That’s roughly 20 times Spirit’s likely operating profit this year as it rebounds from the pandemic, according to Refinitiv forecasts. If achieved, the benefits would give JetBlue a 10% return on its investment, according to Breakingviews calculations.
JetBlue could point out that, according to the DOJ’s own analysis, its entry into a market tends to lead to lower overall fares as legacy carriers adjust their prices. But that seems an uncertain payback for a deal likely to jeopardize Spirit’s fares, which are among the industry’s lowest. Asking the target company’s board to accept the regulatory risk looks like a big hurdle. If competition concerns ground this takeover, JetBlue investors will breathe a big sigh of relief.
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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
CONTEXT NEWS
- JetBlue on April 5 said it had made an offer to acquire rival Spirit Airlines for $33 a share in cash, valuing the ultra-low-cost airline’s equity at around $3.6 billion. The offer comes after Spirit on February 7 agreed to merge with fellow low-cost carrier Frontier Airlines in a cash-and-stock deal valuing Spirit at $2.9 billion.
- JetBlue is already facing litigation from the U.S. Department of Justice, which is seeking to block its Northeastern Alliance agreement with American Airlines. Under the terms of the partnership, JetBlue and American pool resources and revenue in certain markets in the Northeast.
- JetBlue shares were down 5% at $12.94 by 11.30 a.m. (1530 GMT) on April 6. Spirit Airlines shares were trading at $26.47, about 25% higher than prior to JetBlue’s bid.
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